Tokenisation in real estate: A look at what's possible

Commercial real estate markets could be headed for a future where big, chunky assets are more easily accessible.

September 20, 2018

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The catch: Investors won’t get to own the whole building.

The idea of offering landlords a way to sell pieces of properties could become more prevalent with tokenization, which helps break up an asset into investable bites. In real estate, this could look something like this: a property owner splices a building into shares, with each one holding a particular value. This value would be represented by tokens, which can in turn be traded.

There are already some famous tokens like Bitcoin. Other tokens are being created specifically for the real estate market.

“Blockchain-based cryptocurrencies, such as bitcoin or ethereum, are feasible as means of payment in real estate transactions, and as a mean of crowd-investing in real estate around the world,” says Anuj Nangpal, Asia Pacific Lead of JLL Spark Global Venture Fund. “Also noteworthy are business models that seek to issue a regulated, blockchain-based cryptocurrency secured by shares in Real Estate Investment Trusts (REITs).”

While it’s yet to fully catch on with property investors, some experts see it as a matter of time. Tokenization is already being used in other industries. Take Crowdvilla, which allows consumers to buy tokens that can be used for stays in holiday homes in the company’s own portfolio.

RealFuel is a token being launched just for real estate. Its founder, Julian Kwan, is betting that tokenisation and initial coin offerings will become more prevalent in the industry.

“Right now in Asia, if you want your property rights protected, you have to pay extremely high prices to buy real estate in the likes of Singapore or Hong Kong,” Kwan says. Tokenization makes those investments much more palatable, he says.

Blockchain, caution, and mass adoption

Tokenization is made possible in part by blockchain, which is seen as having the potential to revolutionise real estate and change the way we value our assets.

In its simplest form, blockchain is a distributed database. By recording and combining transactions into a de-centralized, secure ledger system, it creates a “chain” of chronological data that no one party has control of. The value lies in the system’s ability to authenticate and track transactions in real time without the use of a third party, such as a bank.

Because blockchain works as a public ledger, the theory is that the owner of the token representing a property asset is indisputable.

However, mass adoption of tokenization has yet to happen, with investors mostly adopting a wait-and-see approach.

Among the hurdles: real estate generally that don’t take into account tokenized assets, and regulations in some countries that could present liquidity issues, says Nangpal.

“The full suite of real estate transactions lies in the hands of many intermediaries, such as asset and property managers, utilities, banks, land registry offices, notaries, brokers, lawyers and other advisors,” says Nangpal. “It might take a while for the industry as a whole to come around to fully trusting and using tokens or blockchain at large – the excessive volatility in crypto currencies doesn’t help, either.”

Still, there is hope that the technology will catch on quickly, perhaps within only five years. The argument is that the benefits will drive the change.